The pros and cons of arbitration clauses

On behalf of Arthur R. Lehman, L.L.C. posted in business litigation on Thursday, June 15, 2017.

Many New York business have negotiated contracts in which one party has requested the exclusive use of arbitration to resolve disputes. Should such a clause be included? While some attorneys believe that arbitration is a poor substitute for the courtroom to solve business disputes, the more enlightened view holds that the answer depends on a number of factors.

In international business disputes, arbitration clauses allow the parties to choose the rules that will apply, the method of enforceability of an award, and the location of the proceeding. The parties can, for example, agree that the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards will apply to the case, making enforcement of the award more certain than a judgment in a civil case in a foreign country. Arbitration may also facilitate keeping a proceeding confidential. Most courtroom trials are open to the public, whereas an arbitration hearing can easily be held behind closed doors. If trade secrets will be discussed, arbitration may be a better choice.

Despite the foregoing advantages of arbitration, a civil court proceeding may, in some cases, be more effective than arbitration. Discovery is more easily obtained in a civil case than in an arbitration proceeding. If some form of interim injunctive relief is necessary, an arbitrator's preliminary order for injunctive relief may not be easily enforceable, whereas a judge's order for interim injunctive relief is undoubtedly enforceable.

The choice between arbitration or a civil lawsuit often depends on a number of interrelated factors, including the nature of the transaction, the business of the parties to the agreements, and relative cost. Anyone considering asking for or accepting an arbitration clause may wish to consider consulting an experienced business attorney for advice on the relative advantages and disadvantages of each.

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